Treat alternative funding arrangement with caution, says SFF board

The recent media statements from shareholder John Cochrane suggesting there is an alternative funding arrangement waiting in the wings should shareholders turn down the Shanghai Maling partnership, is a total unknown and should be treated with extreme caution, says Silver Fern Farms.

Silver Fern Farms chairman Rob Hewett says the board remains unanimous in its endorsement of the partnership with Shanghai Maling due the significant value it brings to the cooperative.

“The board is unanimous in our support for the Shanghai Maling partnership. It will bring us a secure future as a co-operative which addresses our long-term financial future, supports our global Plate to Pasture strategy, gives us privileged access to China, the fastest growing red meat market in the world, and provides returns to our shareholders and suppliers,” says Hewett.

“We have met with over 2,000 of our suppliers and shareholders in the last 10 days right around the country. Their support is strongly in favour of the partnership.”

The Board has not been presented with any details of the suggested $100 million underwrite which Cochrane is asking shareholders to back.

“The Board has not received a proposal. We do not know any details, we do not know who the mystery underwriters are, nor who the supposed bank is.

“Going from media reports, the potential underwrite would be significantly disadvantageous to shareholders financially, strategically and very likely from a governance perspective,” Hewett says.

“Mr Cochrane, although well meaning, is playing a very dangerous and irresponsible game in advising shareholders to vote down the Shanghai Maling partnership without providing details of the alternative.”

Hewett says the Board has considered all available alternatives, has provided shareholders with over 100 pages of detail on the recommended investment in the Notice of Meeting, including an Independent Expert Report from a qualified firm in Grant Samuel. “That Report concludes that the proposed Shanghai Maling investment is both fair and reasonable to Silver Fern Farm shareholders.”

“Mr Cochrane states in the media that under his alternative, suppliers will get to retain control of the company. In the Board’s opinion there is no evidence that shareholders will invest all of the $100m in the company. Based on the last time Silver Fern Farms raised capital from shareholders, we sought over $100m and only raised $22m. Therefore, it is misleading to say that supplier shareholder control is retained, as it will be the underwriters that will take control.

“If shareholders do not elect to invest new capital, then the underwriters will own nearly 70 percent of the company. If shareholders invest a similar $22m as last time, then the unknown underwriters would own 57 percent of the co-operative.

“There is no visibility as to who these underwriters are; for all we know, a competitor like Alliance could be in the mix.”

“If the underwriters do end up owning such a controlling stake, they will undoubtedly want the right to influence or control the governance of the company. Currently, shareholders appoint farmers to the majority of the Board, who in turn appoint the independent directors. Will the underwriters require their own directors?”

“Further Mr Cochrane is suggesting the shares are issued at 40c each. This is a share price that is around a seventh of the fair value opined by Grant Samuel, and a seventh of the price being paid by Shanghai Maling. Given the high probability that most of these new shares would end up being taken up by the underwriters, shareholders would be selling control of their company for 40 cents per share. That is clearly not in the best interests of the company. And to who?”

“It is incorrect and totally misleading of Mr Cochrane to say there is bank approval for his scheme. We understand he is referencing a letter of interest from one bank to consider participating in a refinancing. That is not bank approval. Whereas, the Shanghai Maling partnership has the full support of our entire bank group and we have committed facilities for the coming season.“

Hewett says a no vote will place the co-operative’s finances in a very uncertain situation.

“We have financing for the coming season based on a yes vote, but not for a no vote.

“The Board will not play Russian roulette by entertaining a totally unknown option which would take the Co-operative into a period of significant financial uncertainty – especially when there is bank approval for the Shanghai Maling transaction. Whereas, that is exactly what Mr Cochrane is suggesting.”

“The Shanghai Maling partnership is not just about the money. It will give us unique market access into the fastest growing red meat market in the world. That is of enormous value. What value do the mystery underwriters provide?”

“With our Shanghai Maling partnership we have worked together to build a strong package of controls to protect shareholders and farmer supplier interests in the co-op. We have pre-emptive rights around shares, a set of co-operative governance principles, and protections to maintain a 50:50 share in the operating company.

“With the Cochrane option we don’t have these protections– those underwriters would come in at a very low entry price, likely gain control of the company and be able to sell their shares to whomever they like. There are no controls over what happens next.

“There is a lack of accountability from Mr Cochrane – shareholders have not elected him, he has no fiduciary duties to our Company and shareholders. He’s providing financial advice to shareholders when he’s in no position to do so. What if he’s wrong? What do you get as a shareholder – an apology? – this is a dangerous game.”

The Shanghai Maling investment values Silver Fern Farms’ equity at $311 million. This equates to $2.84 per ordinary share, which has been assessed by experts Grant Samuel as being fair value.

“Raising $100 million through a share offer at 40cps would require the company to issue 250 million new shares – that is 2.5x the number of shares on offer today. The sheer weight of issuing 250 million shares would mean the Silver Fern Farms share price would be destined to trade at $40c. This is a significant downside for shareholders when compared to the Shanghai Maling partnership.”

“Pro-forma earnings per share under The Maling Partnership (28c per share) are almost twice that of Mr Cochrane’s (15c per share). The dividend return under the underwrite will also be lower for exisiting ordinary shareholders given the 8.25% preferential dividend that will be paid to the underwriters.

“The underwrite suggestion would see shareholders having to put in $1.00 per existing share, whereas the Shanghai Maling partnership will see shareholders actually receive $0.30 per share as a special dividend.”

“The Shanghai Maling Partnership will give us a unique opportunity in the China market, the resources to accelerate our global value added and through these initiatives create additional value for farmers.”

“Mr Cochrane, and his colleagues Messrs Richardson, Shaw and Gardyne are asking shareholders to vote down a game-changing opportunity with a known party that has the unanimous support of the Board, in return for a speculative underwrite, with an unknown group of investors, at a price that is materially below fair value and that does not have a committed banking solution. Their five minutes to midnight suggestion creates significant risk to the company and to its shareholders.”

“Shareholders should read the Notice of Meeting Information Pack and if needed seek independent financial advice.”

Silver Fern Farms is a major New Zealand processor and marketer of lamb, mutton, beef, venison and associated products to more than 60 countries. It is a farmer-controlled cooperative with more than 6,200 Ordinary Shareholders and over 16,000 farmer partners.The company’s vision is “Inspirational Food Created by Passionate People.”

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